Concerns over Irish bank bailout law

The European Central Bank has expressed “serious concerns” that a new law in Ireland could force the central bank to take losses on the collateral it accepts in exchange for loans to commercial banks.

Ireland parliament approved legislation which will give the government extensive powers to restructure the banking sector, including the power to impose losses on subordinated bondholders and transfer deposits.

Opposition politicians have warned that the law, which fulfils Ireland’s pledge to overhaul its banking system as part of a $100 trillion EU/IMF bailout package, will turn Finance Minister Brian Lenihan into a “one-man legislature.”

Analysts said they expected Dublin officials would work out the issue with the ECB and that for now they did not expect it to lead to any major upheavals or threats in the capital being provided to Ireland and its banks.

The bill, however, has yet to be ratified by the Irish president, who will hold a meeting today, Tuesday, to decide whether or not to refer it the Supreme Court amid concerns about its constitutionality.

In a legal opinion published on its website, the ECB said legal flaws in Ireland’s bank aid legislation could affect its rights over collateral and demanded the law be clarified.

“The ECB has serious concerns that the draft law is insufficiently legally certain on a number of critical issues for the Eurosystem,” according to a paper published on the ECB website.

The issues include “the scope of collateral rights of central banks given as security against ELA (emergency liquidity assistance),” as well the rights of the ECB and possibly other central banks in the euro zone.